Many current market participants have never experienced a hawkish Fed. The last time there was a full cycle of rate hikes was from June 2004 to June 2006 when rates went from 1% to 5.25%. The S&P 500 enjoyed a solid uptrend during the period, but it was coming off a bear market that started in 2000 and lasted until early 2003.
Since then there have been a few rate hikes and some threats of increased hawkishness, but it never lasted very long. In late 2018 a hawkish Jerome Powell caused a sharp drop, but coordinated dovishness by central banks around the world put an end to it, and that created another good uptrend until the pandemic hit in early 2020.
This hawkish transition by the Fed is a very major shift for the market, and it is likely to be a bumpy ride. We are seeing some positive action today as Powell wasn't as hawkish as feared, but the issue of interest rates and inflation is not just going to go away after a dip that lasted a week for the indexes.
Tomorrow morning we have a very important CPI report. The computer algorithms will be ready to react to this news, and it is likely to be very volatile.
What we have to deal with now is that every time there is some inflation news, the computer programs go to work. The primary focus of these programs is the rotation trade out of stocks that are hurt by higher rates which are mostly growth names, and into stocks that benefit from higher rates, such as banks and value stocks.
We saw the 'dovish' algorithms hit this afternoon after Powell made a comment about the likelihood that a Fed balance sheet runoff would likely not occur until later in the year. Right now, the 'dove' trade is back on, but market players will be positioned into the close for the CPI news tomorrow.
This sort of algorithm action is tough on stock pickers. What looks good one minute will look bad the next if the algorithms shift from hawk to dove.
Things look pretty upbeat right now, but it is important to recognize that the market is undergoing a major change in character as the Fed deals with the first major rate hike cycle in about 15 years.